Page 1 : Why Property Insight Malaysia Is Wrong
A few days ago, Property Insight Malaysia, a monthly property investment magazine, posted this comparison on renting vs buying a property on their Facebook page.
They claim that renting a RM 320,000 property (instead of buying it) will save you RM 112,570 in upfront costs, and RM 823 in monthly expenditure. Take a look :
Shocking, isn’t it? With figures like that, who in the right mind would buy a property?
What’s really shocking though is the fact that a property investment magazine would come up with such a terribly inaccurate and misleading comparison.
Let’s break down their comparison and show you why it is literally “bullshit”.
It’s Not Apple To Apple
Let’s start with the fact that the two properties are not of equal value.
The “Buying” example adds repairs and painting, renovation and furniture costs, while the “Renting” example assumes that all of those are already part of the RM 320,000 cost of the house. In other words, they compared a RM 403,000 house with a RM 320,000 house – a RM 83,000 / 26% difference in value.
Painting and renovation may be necessary for purchasers of new or old houses, but they are not just “costs”. They add value to the house – the property appreciates because of these improvements.
More importantly, a landlord who’s spends the same amount of money renovating and furnishing his RM 320,000 house is not going to rent it at just RM 800. He/she would probably rent it out for RM 1,000-1,200.
Where Can You Find Such Prices???
Many Malaysians are wondering – where in Malaysia can you still find a house or apartment for sale at just RM 320,000, or for rent at just RM 800?
Not in any major metropolitan areas, that’s for sure. You can only find such places in the suburbs.
We are going out on a limb and assume that since Property Insight Malaysia is a property investment magazine, they are not talking about low-cost housing but lower middle-class housing.
I recently assisted a relative in purchasing a 10-year old leasehold apartment measuring just under 1,000 sf for RM 525,000 in Damansara Perdana. That’s the kind of price city-dwellers are looking at realistically, and it’s 64% higher than their example.
Residents in the same apartment are also paying a lot more for rental. A smaller 850 sf unit can fetch RM 1,700 in rental. That’s more than twice what they used as their example.
The low purchase price of RM 320,000 and the much lower rental price of RM 800 are only possible in the suburbs or rural areas. Keep that in mind when you view that comparison.
Is RM 800 A Realistic Rental Rate?
It depends on whether the house or apartment is valued at RM 320,000 (as claimed) or RM 403,000 (in reality).
The ROI (return on investment) if the property is worth RM 320,000 including renovation and furnishing is 3%. This is considered very low since it’s below the FD (fixed deposit) rate. Generally, investors want a ROI of at least 5%-8%.
The ROI of 3% is also a tad below the inflation rate, which means the landlord ends up losing money. Still, it is acceptable in the suburbs or when the rental market is “soft“. It allows the landlord to keep up with the instalments while waiting for the property to appreciate in value.
On the other hand, RM 800 is an unrealistic rental rate for the RM 403,000 property (including renovation and furnishing) that they actually used in the comparison. That’s an ROI of just 2.38% – far below even the lowest FD and inflation rates. No landlord would stoop so low, unless he/she is really desperate.
Even if we peg the ROI of their RM 403,000 property to the low rate of 3%, that would mean a rental of at least RM 1,008 per month, not RM 800. In other words, they are “off” in their estimated rental rate by RM 208 or 26%.
The Instalment Seems A Bit High
You would be correct. The current effective rate for housing loans (without zero moving costs) range from 4.39%-4.67% per annum. Let’s take an average of 4.55%. With a loan margin of 90% and a tenure of 30 years, that works out to a monthly instalment of RM 1,467.82.
The difference is small at RM 72.18 per month, but very significant. If you actually pay RM 1540 instead of RM 1467.82 per month, you will shave off 34 months of instalments, saving you about RM 51,494.32 in interest!
Based on my calculations, it appears that Property Insight Malaysia used a much higher interest rate of 4.96% per annum in their comparison.
You Don’t Own What You Rent
Technically, you don’t own the house you purchase until you finish paying your housing loan either, but the fact remains – it eventually becomes your property, your asset.
A rented property, on the other hand, will never be your asset no matter how long or how much you pay.